FedEx stopped flying your Amazon Prime packages in June because the partnership wasn't profitable enough - and UPS has the same problem

• Last month, FedEx ended its years-long air freight contract withAmazon.
• Insiders pointed to Amazon's low-margin business for why the Memphis-based package giant cut its business with the retailer.
• UPS has a similar issue with Amazon in that moving the e-commerce giant's packages yields lower profit - but UPS depends far more on Amazon for revenue than FedEx does.
• Visit Business Insider's homepage for more stories.

FedEx raised eyebrows last month when its air freight division dumped America's largest online retailer - Amazon. The Memphis-based package giant told investors last month that it expects to recoup losses stemming from that decision by fiscal year 2021.

The end of the partnership has raised questions about just how much money can come out of working with Amazon. It's a customer with a lot of volume but not a lot of money to be made on each parcel, analysts say.

Amazon made up some 1.3% of FedEx's 2018 revenue. Donald Broughton, the founder and managing partner of Broughton Capital, told Business Insider the operating profit from that revenue was under 0.25% - "something between tiny and zero."

Read more: A key metric in FedEx's financial statements underscores why the shipping giant dropped Amazon as a customer

The proliferation of high-volume, low-margin customers like Amazon is clear in FedEx's most recent quarterly report. FedEx's US deferred package segment (non-priority shipments, and e-commerce parcels) increased by 24% in volume, but dropped by 7% in revenue-per-package.

Amazon packages are less profitable for UPS, too

That discrepancy also exists for FedEx's Atlanta-based rival, UPS. And UPS is far more dependent on Amazon than FedEx was.

Amazon declined to comment for this story.

According to the SJ Consulting Group's principal consultant Satish Jindel, Amazon comprises 3.6% of revenue at UPS - twice the revenue share of FedEx. Some analysts estimate UPS's revenue from Amazon to be as high as 5% or 10%.

UPS makes $6.21 per Amazon package when moving the parcel through its Ground network (how UPS moves a package during the last leg of its journey before delivery), Jindel estimated. According to the company's most recent quarterly report, the average revenue per piece on all of UPS's Ground packages is $8.76 - 41% higher.

In a July 10 report, the Goldman Sachs transportation team estimated that FedEx's margin on Amazon air express packages was 4%, compared to a 7% margin in its overall air-express business.

UPS also moves Amazon packages through its air network, UPS vice president of public relations Steve Gaut told Business Insider. Its revenue-per-piece on all UPS air and ground movements is $10. UPS does not provide revenue-per-package information on individual customers.

While the margins from working with Amazon are lower, Jindel emphasized that UPS is indeed turning a profit from its business with Amazon - it's just not as high as it could be.

"If they're getting the density - and these are not big, heavy packages and traveling a short distance - I would not expect UPS to be losing money on any customer," Jindel said. "Their profit margin would be lower, but they wouldn't be doing it below cost."

Pressure is on for more investments - and more cash inflow

Former UPS executive Cathy Roberson, now an analyst with Logistics Trends & Insights LLC, said UPS is in need of more cash than ever as the company pours money into high-tech sort facilities called "superhubs." UPS is in the middle of a three-year investment program to build new, or retrofit existing locations, Gaut said.

"UPS has been investing heavily into their network and they've got to pay for it," Roberson told Business Insider. "And Wall Street is putting the pressure on them, as well as on FedEx, as Amazon is looming over them."

One of the newest superhubs, which opened in Atlanta in late 2018, required a capital investment of $400 million. The facility can sort 1,700 packages per minute. Globally, UPS opened 22 new or retrofitted automated facilities last year and an additional 18 automated hubs will open in 2019.

Read more: UPS said automated facilities will help sort almost 80% of its packages this year

These investments will command 8.5% to 10% of UPS's $72.9 annual revenue in the next several years.

In its most recent earnings call to investors, analysts from Barclays, Citi, and others demanded that UPS provide more clarity about its free cash-flow and capital expenditures. Brandon Oglenski of Barclays asked how UPS's investments of $6.3 billion last year was helping technological advances.

"The key is its ability to leverage significant 2018-2020 capital investment into domestic profit improvement," Goldman Sachs analysts wrote in a July 10 report on UPS and other package carriers. "After years of underinvestment, we think the leverage potential is quite meaningful, especially given the anticipated growth in e-commerce volumes to layer into an enhanced and automated 'smart' network."

Will UPS ditch Amazon too?

Roberson said if Amazon's margins don't increase, UPS might follow FedEx's lead and curtail its business with the retailer. "I worked for UPS for a number of years and they have walked away from unprofitable customers," Roberson said. "I think it will come to a point where they will be willing to walk away when it's not profitable for them."

UPS denies that. "UPS continues to support Amazon and all our customers to ensure we provide value with the broadest portfolio of solutions in the logistics industry," Gaut said in a statement.

Other experts agree that it's unlikely UPS will ditch Amazon as FedEx did. But, at a certain point, they said it may be likely that Amazon will move away from UPS. Morgan Stanley's Ravi Shanker estimated that it costs Amazon $6 to move a single box through its own network, versus $8 to $9 to move through UPS or FedEx.

Amazon has a ever-growing interest in in-housing their package delivery network to cut costs and have better control over its logistics capabilities, quickly building a network of planes, trucks, trains, and ocean freighters in just a few years. "It's clear that Amazon has got ambitions to build up their own network," Kevin Sterling, managing director of Seaport Global Securities, told Business Insider. "They're getting their hands on planes as fast as they can."

Read more: UBS is now sounding the alarm on Amazon taking on UPS and FedEx - and analysts say the logistics giants have 'limited' tools to fight back

Some moves suggest the retailer is launching a third-party delivery company to compete with FedEx and UPS. Starting this year, Amazon has begun describing itself to investors as a "transportation and logistics services" company.